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Power Plays

Submitted by The Dubya Report on Tue, 08/26/2003 - 00:00

"Politics, not lack of power, is to blame for the great American blackout," wrote the Economist on August 21. While cautioning that "not all the facts are in," researchers at Cambridge Energy Research Associates (CERA), a private energy consulting firm, have tentatively concluded that the massive power blackout of August 14 began with a series of failures by First Energy, a power conglomerate created from the merger of Toledo Edison, Cleveland Electric, Ohio Edison, Pennsylvania Power, Pennsylvania Electric, Metropolitan Edison and Jersey Central Power & Light. The nation's fourth largest investor-owned electric system, according to its web site, First Energy has been cited previously for plant mismanagement and accounting irregularities.

In 2001 the Nuclear Regulatory Commission (NRC) sought to inspect First Energy's Davis-Bosse nuclear reactor, located near Toledo, OH, at the west end of Lake Erie. First Energy persuaded the NRC to delay the inspection until February 2002, but in March of that year workers discovered a foot-long hole in the plant's reactor head caused by boric acid corrosion. According to Public Citizen, the NRC report on First Energy noted a "lack of safety culture." First Energy admitted that it prioritized "production over safety."

Earlier this month a financial restatement reduced First Energy's 2002 earnings-per-share by 11%. It is now the target of a class action lawsuit alleging "accounting improprieties" that inflated profits. Like failed energy giant Enron, First Energy employed Arthur Andersen as their accountants. And like Enron, First Energy has close ties to the Bush administration and the Republican party.

First Contributors Have a History

First Energy executives are among Bush's top campaign fundraisers. First Energy President Anthony Alexander was a member of the "Pioneers" -- the Bush campaign group composed of individuals who raised at least $100,000 each during the 2000 campaign. As a member of the Republican National Committee's Team 100, Alexander raised $250,000 in 2000, and personally donated $100,000 toward Bush's inauguration events. Alexander also served on the Bush energy transition team. And on June 30 of this year First Energy's chairman, H. Peter Burg hosted a $1,000-a-plate dinner at the Akron Hilton that raised $600,000 for Bush's 2004 campaign. In 2001-2002 First Energy executives contributed more than $1 million to federal candidates, with over 70% going to Republicans, placing the firm in the top ten political contributors from the electric utility industry. First Energy also spent $3.8 million lobbying Congress and the administration in 2001-2002.

In the 70s, Democratic presidential candidate Dennis Kucinich confronted one of First Energy's predecessors, Cleveland Electric (CEI), when it sought to undermine the City of Cleveland's ability to operate a municipal electric system, Muny Light. Muny Light provided power to streetlights and many city facilities, and to residential customers in parts of Cleveland at a savings of 20 - 30% over CEI. In a precursor to schemes that Williams and Enron would use later in California, CEI worked to prevent Muny Light from buying power from other suppliers, and then tripled the rates it charged. When Muny Light began to lose money as a result of CEI's schemes, CEI cited Muny Light's deteriorating financial condition as as evidence supporting their contention that the city should sell Muny Light to CEI. With the aid of local media that, in Kucinich's words, "received substantial advertising revenues from CEI," CEI succeeded in convincing Cleveland's mayor and city council to sell Muny Light in 1976. Kucinich, who held the elected office of Municipal Court Clerk at the time, organized a campaign to prevent the sale, and ran for mayor of Cleveland on the issue. He won and canceled the sale.

Two years later Cleveland Trust, Ohio's largest bank, informed Kucinich that it would not renew 15 million in loans taken out by his predecessor, unless he agreed to sell Muny Light to CEI. The bank offered $50 million in new credit if Kucinich would agree. Kucinich refused, and the City of Cleveland defaulted. Kucinich lost the election in 1979. Later it would emerge that Cleveland Trust that Cleveland Trust held a substantial interest in CEI, and that the firms had four directors in common. Kucinich's decision was vindicated in 1993 when Muny Light, now renamed Cleveland Public Power, announced the largest expansion of any municipal power system in the country.

First Failures

Fast forward ten years. At about 2pm on August 14, 2003 First Energy's 550-megawatt coal-fired Eastlake power plant east of Cleveland, OH, shut down. An hour later a single transmission line near Cleveland went out of service. By themselves, these incidents should have been routine. According to CERA Senior Consultant Hoff Stauffer, "they're designed to be able to withstand that kind of event without any problem." But those events were only the beginning.

The control room alarm system, which ordinarily would have notified operators of the generation and transmission problems, apparently did not work. With a transmission line unavailable, power that might have traveled along it flowed onto other lines, which heated up -- "as anticipated," says Stauffer. Also anticipated is that overheated power lines sag, which First Energy's did. But not anticipated was that one of the lines would sag into a tree. "That tree was not supposed to be there," Stauffer observed dryly, and so a second power line went out of service. At this point First Energy was experiencing four simultaneous problems, "and systems are not designed to be able to withstand that without some kind of blackout to at least some of their load," said Stauffer.

The American Electric Power (AEP) system to the south and the PJM to the east, successfully disconnected from First Energy, thereby protecting the supply of electricity to the Midwest, including Chicago, and to the east, including most of Pennsylvania, New Jersey, and Maryland. "But," the New York Times's Richard Glanz and Andrew Revking wrote, "the severing of the two crucial Ohio lines was the equivalent of suddenly damming an onrushing stream: the flow had to divert to find a way to reach the Cleveland area." The power flowed into Indiana, Michigan, and back into Ohio. As a result, within a few seconds power in a grid serviced by the International Transmission Company (ITC) in lower Michigan went from a modest 200 megawatts to nearly 2000. At the same time, power that had been flowing from ITC to Ontario began to flow the other way, into northern Ohio. This caused instability in ITC's system, which took plants and transmission lines in eastern Michigan out of service, eventually causing a blackout in Detroit.

With eastern Michigan no longer exporting power to Ontario, the system there could not maintain stability, leading to the blackout in Toronto. New York then attempted to disconnect itself from Ontario, but the resulting instability tripped off power lines and plants in New York State, blacking out the state, including New York City. PJM, already having disconnected from First Energy, now disconnected from New York, thereby preserving the power supply to Philadelphia, Baltimore, and Washington.

'Third World Grid' or Communication Failure?

"We're the world's greatest superpower but we have a third-world electricity grid," quipped former energy secretary Bill Richardson. CERA's Stauffer took issue with Richardson's characterization, arguing instead that issues of communication and coordination were primarily at fault in allowing what should have been a local problem to cascade across such a large area of the country. Noting that any complex system will have component failures, CERA senior researcher Lawrence Makovich observed:

... [W]hat we've seen here in the blackout is a combination of some normal component failures which would have resulted in a problem, and the real problem with this is that there was a failure in the coordination and control of the power networks that led to the cascading failures here. And when we answer the question what shouldn't have happened, the real problem here is -- this should never have reinforced and cascaded the way that it has. So it was a combination of normal failures, and an inability to control and coordinate the system at various levels that's created such a massive blackout.

Makovich and Stauffer also cited the need for investment in the power transmission network, where investments have achieved record lows for the last five years or more. Their view was echoed by the Economist which noted that that so-called deregulation in the US has increased the supply of power, but "given little incentive for investors to upgrade the grid itself." This is in contrast to the situation in the UK, where during the 1990s the national grid operator spent in relative terms 10 times as much upgrading the power grid as was spent in the US during the comparable period. Stauffer noted that not only is investment needed within the "organized pools," but between them. A major study of the issue, the initial installment of which CERA expects to have completed next month, finds

...[T]here's major congestion between the Midwest and the East and the South, where we have a lot of low-cost energy available in the Midwest, that cannot get to high cost areas on the east coast, and in the South.

According to Stauffer, spending money to make it easier for power to travel east and south will eventually save billions of dollars. This investment opportunity is not well understood, suggested Stauffer. Individual pools understand their needs, he said, but "but it's been nobody's job to deal with the inter-pool transmission constraints. And as yet, in our state of partial deregulation, nobody's looking at it yet. And as yet, nobody's even talking about it."

Even the networks that have a federally approved state or regional operator don't have a program for planning and investment approved by the Federal Electric Regulatory Commission (FERC).

Stauffer joined other experts and commentators in identifying the need for enforcement of reliability standards. "Obviously the voluntary approach has not worked," he said. Arguing that a federal authority is needed to set and enforce standards, and apply sanctions if they are not met, Stauffer noted, "...[W]e see from this recent extremely unfortunate event, that the adverse consequences that can happen from an adverse condition in one part of the country can cascade into another part of the country if the proper reliability standards are not met." A 2000 CERA study of the future of electrical power transmission warned that one possible scenario was a massive cascading blackout. The study concluded that such a scenario would be followed by a backlash that could lead to "federal involvement in the organization of the transmission network, including its operation and control."

Representatives of the Midwest Independent System Operator (ISO) and the New York ISO questioned the CERA suggestion that failures of communication and coordination had contributed to the blackout, arguing that events moved to quickly for human intervention to have made a difference. (In several parts of the country the flow of electricity through power grids is managed by ISOs.)

AEP, on the other hand, said the CERA analysis was consistent with AEP's data, although company officials refused to speculate further about the cause of the blackout. Ellen P. Vancko, spokesperson for the North American Electric Reliability Council (NERC), the industry organization responsible for preventing grid problems, told the Times that the group had not seen the CERA report and could not comment. Two years ago, however, a NERC report warned that the increased transmission of electrical power over long distances was straining the ability of regional centers to respond to emergency situations.

The report also voiced concern that the profit motive might lead utilities to limit expenditures for system maintenance and safeguards, as the industry moved from regulated sales at fixed rates, to an unregulated market environment. "Systems are being run 'closer to the limit' than ever before, and the risk of a disturbance precipitating a cascading outage is great.... Unfortunately, it usually takes a system disturbance to highlight weaknesses in the operation of the electric system," the report said. A NERC report from May of this year warned of the need for power operators in Michigan and Ohio to coordinate carefully because of recurring large unanticipated power flows, according to the Washington Post.

Staying Regular

Many observers suggested that the required restructuring includes both tangible investments and policy changes. The Economist called the current power regulatory system "bizarre" and "obsessed with supply rather than delivery or demand, that veers between over- and under-regulation, and that ultimately stifles the investment needed to keep the lights on."
CERA's Makovich:

...[W]when we talk about underinvestment in the transmission network, it is the very limited definition of the dollars spent on lines and substations. But really in a broader sense we need to make the investment in the policy side, to get this part of the power business reorganized, to get the rules and institutions in place, to make the kind of coordination and management that we need to have in place to avert these kinds of failures in the future....

Some critics of deregulation suggested that power producers are discouraged from repairing of expanding the transmission networks, because such expenditures reduce profitability. Others have pointed to a transmission system that was built to serve local markets, but which is now strained to support the transmission of power over great distances that comes with trading of electricity under deregulation. Deregulation, they have argued, encourages power generating companies to overload their transmission lines, because they must sell as much power as possible if they are to make a profit. Further, deregulation at the state level has removed the requirement that ratepayer money be reinvested in the transmission system, and the market has not made the investment either.

Speaking at a fundraiser in Southern California the day after the blackout, Bush touted his energy bill. "Congress needs to complete work on a comprehensive energy plan that ... will help us modernize our infrastructure." But the national energy market that some supporters of the Bush bill believe is needed has drawn strong opposition from areas that currently have inexpensive electrical power: the Northwest and the Southeast. Consumers and utilities in these areas are concerned that nationalizing the power market would reduce their local control and raise the price of electricity.

Even without the national market provision, which Energy Secretary Spencer Abraham signaled the administration might be willing to drop, the Bush energy bill contains contentious issues unrelated to improvement of the nation's power grids. The Economist has ridiculed the Bush energy policy and the rhetoric used to sell it, noting that the "supply crisis" invoked to justify drilling for oil in ANWR did not exist, and that "drilling all the oil in Alaska and installing windmills across the mid-west would still not have stopped the grid from going down last week."

Michigan's Rep. John Dingell told the Wall Street Journal that the prospects for legislation to improve the electric power infrastructure depended "on whether [Republicans] really want to address the question of reliability, or whether they want to use reliability simply as a lever to produce a vast compendium of special-interest responses." Other Democrats, such as Washington's Maria Cantwell, urged Congress to focus on the power grid itself. "We should take swift action on reliability standards, regardless of the larger energy bill," she said. "Don't hold that hostage."

One provision that does have bipartisan support,and that in the opinion of some observers could be passed on its own, would give the NERC power to enforce reliability standards. Created after the blackout of 1965 to set standards -- including, for example, how much power can run through a transmission line -- and monitor coordination among power producers, NERC has warned Congress repeatedly that deregulation has made it harder for NERC to enforce standards. NERC officials have asked that it be transformed into an organization more like the New York Stock Exchange -- self-regulating but with enforcement powers. NERC General Counsel David Cook wondered aloud to the Journal, "I wonder, if we had the legislation, if this might have been prevented."

Republicans want to "incentivize" utilities, to encourage improvements in the transmission network by allowing the market to set rates. Democrats counter that "incentivizing" is a euphemism for rate increases, and they prefer government loans or direct investment in power infrastructure. While previously advocating national deregulation, the administration appeared to be backing away from that position in the aftermath of the blackout. Appearing on CNN's Late Edition, Secretary Abraham suggested that "forcing it down the throats" of states" was not as important "as building mandatory reliability standards ... as putting incentives in place to build transmission lines."

Deregulation opponents said the blackout highlighted their contention that a national network was dangerous because additional interconnections would increase the likelihood of broad outages. A spokesman for Republican Sen. Richard Shelby of Alabama told the Journal that the power failures "reinforce our need to focus on reliability ... rather than creating a new national market." But former pest exterminator Rep. Tom Delay of Texas told Fox News, "The House hasn't agreed to put it off. We'll have the votes for it." And Ken Lay's hand-picked head of FERC, Pat Wood, argued that a national market offered the best hope for encouraging investment in the transmission network, telling the Journal "I don't see any credible argument that can be made against that."

Déjà Vu (and lack thereof)

Opponents of deregulation have blamed the malfunctioning electrical power markets on efforts to weaken the Public Utility Holding Company Act (PUHCA), which limits the kinds of investments that public utilities can make. The repeal of PUHCA, which is part of the Republican energy bills currently under consideration in Congress, could usher in a series of mergers, critics suggested, leaving a few large companies like First Energy in control of all electrical power generation in the US, with minimal governmental regulation. The PUHCA dates back to the Roosevelt administration when, an unregulated utility conglomerate created by Wall Street deal maker Samuel Insull collapsed, threatening to black out cities throughout the midwest. Public utility expenditures and profits were limited, power markets were prohibited, and using power outages as blackmail to increase rates was criminalized.

The Bush clan has a long history with electric utilities deregulation. During the Reagan administration, FERC chair Martha Hesse began laying the groundwork, and in 1992 "Poppy Bush" signed the Energy Act, giving FERC the power to mandate transmission and competition in the wholesale power market. Eight years later electric power companies donated $16 million to Republican campaigns, more than seven times the amount they contributed to Democrats. The real prize, however, lay in deregulation at the state level. FERC mandated deregulation of power transmission in 1996; producers could now sell power to the highest bidder, regardless of consumer needs. During a heat wave in 1998 electricity prices in the midwest reached a record at 104 times normal -- ironically in the same area where the threat of blackout in 1932 had originally led to federal regulation.

Also in 1998, after power companies spent $39 million to defeat a referendum advocated by Ralph Nader that would have blocked it, California passed deregulation laws allowing customers to "choose" their power company. The first company to sell its generating capacity and deregulate was San Diego Gas and Electric. During the summer of 2001 San Diego was forced to buy power at "market" prices. Consumer pressure forced the California legislature to cap utility bills; utility companies had to sell power at a loss; Pacific Gas and Electric filed for bankruptcy, and Southern California Edison came close. As now embattled California Governor Gray Davis wrote in an op-ed piece for the San Francisco Chronicle almost exactly two years ago, "when a utility goes bankrupt the costs don't go away."

Enter Enron. During the "auctions" for electrical power purchased by the state of California, Enron and other companies made bids they knew they could not meet. In one instance Enron bid to provide 500 megawatts of power over a 15 megawatt line. Had they actually attempted to do so, the line would have burned up. Dr. Anjali Sheffrin, economist with the California state Independent System Operator estimated that during eight months in the year 2000, three power producers billed California $6.2 billion in excess charges through false bids, and physical or economic manipulation. In December 2000 then President Clinton signed an executive order that imposed price caps on electricity costs in California, and shut Enron out of the market there.

But within three days of his inauguration, "Junior" reversed Clinton's order, allowing Enron, Reliant, Texas Utilities (all Texas firms), among others, back into the California market.

In April 2001, Enron's Ken Lay met with Vice President Cheney to discuss energy policy. Seven of the eight recommendations Lay gave Cheney during that meeting were included in the final draft of the energy policy. A month later, a PBS "Frontline" reporter asked Cheney if power companies were manipulating prices in California. "No," Cheney said. "The problem you had in California was caused by a combination of things--an unwise regulatory scheme, because they didn't really deregulate. Now they’re trapped from unwise regulatory schemes, plus not having addressed the supply side of the issue. They've obviously created major problems for themselves and bankrupted PG&E in the process."

Later that month, according to journalist Jason Leopold, currently finishing a book on the California energy crisis, Ken Lay met with former Los Angeles Mayor Richard Riordan, junk bond king Michael Milken, and political aspirant Arnold Schwarzenegger at the Peninsula Hotel in Beverly Hills, to discuss a plan for solving the California energy crisis. At the meeting Lay distributed a four-page document that called for:

An end to investigations into Enron’s role in the California energy crisis

Consumers rate increases to pay for the costs of California's experiment with deregulation

Full deregulation of the electricity market in California

Five days later, Bush met with Governor Gray Davis at the Century Plaza in West Los Angeles. Davis charged that Texas power companies were manipulating the California electricity market, and asked for federal assistance, such as the price caps Clinton had imposed. Bush refused, and, echoing Cheney's earlier comments, suggested that the problem was that California had not deregulated completely, and that it was Davis's problem.

Since the collapse of Enron in October 2001 evidence of Enron's scheme to defraud the citizens of California has emerged, and in December 2002 Enron trader Timothy Belden pleaded guilty to conspiracy to commit fraud. Belden is cooperating with federal investigators.

In November 2002, in response to a lawsuit by the Wall Street Journal, FERC released a report documenting exactly the sort of market manipulation that Gray Davis charged in his May 2001 meeting with Bush. The report details a series of conversations between officials of Tulsa, OK-based Williams Companies, and AES Corp. of Arlington, VA. AES operated two plants in the Los Angeles area whose electricity was marketed exclusively by Williams. The conversations, recorded during April and May 2000, discussed intentionally prolonging a maintenance outage at one of the plants.

The maneuver enabled Williams to charge the California ISO $750 per megawatt hour for power from alternative sources. Some of the power came from units in a plant that was simultaneously supplying power elsewhere at $63 per megawatt hour, producing an additional $10 million in revenue over a 15-day period.

Journalist Leopold noted that "It's highly unlikely that Bush, Cheney and members of the energy task force were kept in the dark about the Williams scam, especially since the findings of the investigation by FERC took place around the same time the policy was being drafted." But, he suggested, the report was kept under wraps because it did not jibe with the energy policy "which was made public instead in May 2001."

Despite the recent history, or perhaps in light of it, the Economist warns of the twin dangers of using the blackout to justify either delaying market reforms, or deregulating completely. Citing the example of Europe, which agreed recently to speed up reforms, the Economist asserts, "... [D]eregulation must not mean no regulation." "Paradoxically," the Economist suggests, "the transition to competitive markets can necessitate a greater, albeit carefully circumscribed, role for a regulator."